[26] Digital Reputation: Inflexibility is a Feature
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Last time we explored why NFTs are important. Today we wanted to double click on the idea of reputation online and what is needed beyond technology like NFTs to enable sound digital reputation online that we can trust.
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Last time, we explored Why NFTs were so important, and it really came down to being able to represent value and ownership through non-fungible things on the Internet… something that wasn’t really possible until NFTs came about.
Of course, the further down the rabbit hole you go, the more you start thinking, what else can be represented with NFTs and more broadly, where does an early technology like NFTs go from here?
Like most new technologies, it helps to understand the individual characteristics, explore the extremes, and imagine where they land in practice to drive utility for users.
For example, with NFTs, one key characteristic we explored was the concept of fungible goods versus non-fungible goods. Another key characteristic we explored was the concept of digital versus physical. With these two characteristics you have four scenarios:
Fungible goods in the Real world
Fungible goods in the Digital world
Non-fungible goods in the Real world
Non-fungible goods in the Digital world
Thinking through each one of these quadrants allows us to explore primitives / building blocks that should exist online as our digital lives continue to increase in importance.
In Web 3, people have started to use NFTs to represent their identity online. Reputation naturally follows.
It looks something like this: if an individual today was using their Bored Ape (BAYC) NFT as their profile picture online, and they build this brand of writing good insights and content, you start to associate their NFT with a particular reputation. Jenkins the Valet is a great example of this.
While there are examples where NFTs support reputation today, it’s still limited by a key feature of NFTs given they are transferrable.
Transferability: Feature or Bug 🔁
Wait, I thought the whole idea of NFTs was that they represent assets and can be freely transferrable without the need of intermediaries?
Yes, that is largely correct, especially when the use case for NFTs is to represent something valuable, then transferability is a feature.
But there are instances where transferability is a bug…
Enter Reputation (Pedigree and Credentialing)
Reputation is not a new concept, it’s everywhere in our world today. Reputation is another way to say social trust. If you have a “good” reputation, people want to work with you and if you don’t, people want to avoid you. Today reputation is represented through things like titles and degrees. In the Web 3 world, they are largely being represented by NFTs and what’s in your wallet.
The problem with NFTs and really any token in the reputation use case is… was that “reputation” earned or bought? (For a deeper dive on this, see: a16z Future article by Scott Kominers and Jad Esber)
“Earned” suggests one has completed actions to get that reputation, whereas “bought” implies one didn’t necessarily earn it, but simply acquired it.
Reputation is about signaling value, prestige and trust that the person and/or entity holding the reputation represents something of value. I.e., this credential, or that title, or that NFT should be associated with some belief about the holder.
In the real world, we depend on reputation systems every day. When you go to a doctor, you wouldn’t trust them if they didn’t have a medical degree or the proper licensing. When you hire someone to advise you on your business, if you care about what degree they have and where they went to school, then being able to verify those credentials matters.
What is not always evident is that we are constantly validating reputation through the idea of credentials. I trust you because you have this piece of paper from xyz school. In the real world, that piece of paper is not easily transferrable and usually given to someone without the feature of transferability.
If that piece of paper was easily transferrable, then we would not trust the reputation that piece of paper represents.
For example, if I can just buy a medical degree, it doesn’t mean I am qualified to practice medicine. You don’t want people being able to buy medical degrees and practice medicine… non-transferability is a critical feature of this reputation system.
But in a digital world, validating reputation (especially in pseudo-anonymous systems) is quite hard.
If you are looking to work with an influencer to grow your product’s brand, what signals do you have about which influencer to work with? How do you assess reputation?
The most obvious one is the number of followers… but how do you know those followers were earned not bought?
NFTs today suffer from this problem as well… say Person A buys a BAYC (Bored Ape) NFT early on and contributes heavily to the community, but then later after the run up of prices for BAYC sells that BAYC to Person B. Person A and Person B should have different reputations… because Person A actually contributed to the community and Person B hasn’t. But in this case, the reputation signaling mechanism through the BAYC NFT doesn’t distinguish this.
Non-transferability is critical to reputation systems if we want to trust the reputation system.
Soulbound NFTs: Inflexibility is a Feature 🗝
Recently, a new primitive has been introduced called Soulbound Tokens. See the paper here written by Glen Weyl, Puja Ohlhaver and Vitalik Buterin. 🧠🧠🧠
In short, Soulbound NFTs (SBTs) are non-transferrable NFTs.
But this simple primitive / building block has the potential to enable a bunch of things in Web 3.
With non-transferrable NFTs, we might finally take a big step toward reputation in the digital world without the need for intermediaries.
Like most things in Web 3, Soulbound NFTs enable trust in a trustless manner, i.e. Can I trust you enough to work with you without needing to trust a centralized entity to validate your reputation?
One area that was particularly notable (in addition to credentialing) was that with Soulbound NFTs you might enable things like undercollateralized lending in Web 3.
Undercollateralized lending is massive! This is literally what credit runs on… trust and a model to underwrite that trust and price it. Because of some acceptable risk and mechanisms, you can underwrite lending based on some reputation scoring and introduce risk models.
The point here is there are many instances when non-transferability is required and actually a feature that you want. Sure… when things (assets, stocks, etc) need to be more liquid (easily tradable), of course transferability is critical… but there are many instances when you don’t want things to be so liquid or easily tradable.
For example, you don’t want apartment leases to be traded so easily (i.e. liquid) … because the contract states there is some “agreed on inflexibility”… this means when you sign a lease for 12-months… there is agreed on inflexibility for a period of 12 months between both sides.
So anything with intended inflexibility has a potential use case to explore with SBTs.
So What? 🤔🧐
Most of the world runs on contracts… everything is just a series of contracts, and when they are binding, it brings some order to society and the systems in it.
The potential use cases here make SBTs a huge market. All contracts can be boiled down to some level of agreed on inflexibility between multiple parties.
Okay back to Reputation… we think Reputation is the ultimate social contract and hence enabling inflexibility, but with all the benefits that NFTs bring, is a critical feature!
Sound digital reputation (that mirrors what we have IRL) in Web 3 is a key building block that will enable people in a decentralized world to trust and work with each other while keeping the psuedo-anonymous nature of the internet.
Reputation gives contracts (in the digital world) more weight.
Soon… the reputation you earned from the work you do in one community may be ported over to another community. Absent digital reputation, you would have to start over every time you enter a new ecosystem because people might have to get to know you all over because there is nothing they can trust or use to verify your digital reputation…
We sometimes take for granted the idea of reputation in the real world. In the work place, we might work on a project together and observe signals to evaluate a person’s reputation. On the internet, all the signals of reputation that we are used to IRL may not apply.
But remember, we are spending more and more time online and it’s only accelerating… so we need other ways to evaluate reputation in a digitally native way.
Digital reputation is one of the key building blocks that enables the next stage of growth for Web 3.